SEC proposes civil and administrative enforcement powers

By Dinali Goonewardene

The Securities and Exchange Commission (SEC) proposes to amend the SEC Act to introduce a range of administrative and civil enforcement powers to deal with capital market offences. Civil sanctions include instituting civil proceedings in a court and recover ill-gotten gains from offenders, seeking injunction orders from the court to restrain unethical and abusive market conduct, restituting investors who have suffered losses as a result of the offences from the recovered monies, banning of directors of listed public companies and recovering legal costs.

Administrative sanction include imposing administrative fines, claiming the administrative fine as a debt owing to the commission in the event the offender fails to pay the penalty imposed or make the restitution ordered, issuing public reprimands, directing the offender to mitigate breach including making restitution, and imposing a moratorium or prohibiting dealing in the company’s securities in relation to the issuer or promoter.

The SEC Act currently has no provision on civil enforcement action. The introduction of these amendments will enable the SEC to apply to court for various orders premised on a breach of the act, regulation and rules made under the SEC Act and any breach of the rules of an exchange.

The SEC may invoke the new provision to make the application to court when: there is likelihood that any person will commit an offence or contravene a provision or requirement of the act or a person has contravened a provision or requirement of the act.

The SEC will be empowered to impose a penalty in proportion to the severity or gravity of the breach not exceeding an amount which the SEC will determine as a matter of policy. The maximum administrative penalty which the SEC may impose will not exceed Rs. 10 million.

A reprimand will serve as a warning to the offender for minor breaches which the SEC views as not serious as it had not impacted the market and no investors have suffered loss.

The ability of the SEC to issue a directive is important in cases where the SEC need to act swiftly to rectify a breach especially in cases where there is insufficient or misleading disclosure to investors. In such cases it is crucial for the SEC to be able to direct the person in breach to make further disclosure or to rectify the earlier disclosure.

The person subject to the administrative sanction must be given the right to appeal against the sanction imposed. This is in addition to the right of judicial review available to all who are aggrieved by an administrative decision under section the SEC Act.

In determining whether administrative sanction should be applied the SEC may take in to consideration the nature and seriousness of the breach or contravention, whether there was a contravention deliberate or reckless, the duration and frequency of the breach and whether the breach reveals serious or systemic weakness in the internal controls relating to the business of the entity. The impact of the breach on the integrity and orderliness of the capital market, whether public confidence in the capital market was affected, loss or risk of loss to investors, and the nature and extent of any offence caused by the breach.

In order to reflect the seriousness of market misconduct such as insider dealing, market manipulation, fraud and disseminating false and misleading statement, administrative sanction and compounding will not be made available for these offences.

In enforcing civil action the factors which will be considered include whether the offender has made a profit or avoided a loss as a result of the breach, contravention or misconduct, whether the conducts more serious in nature and the application of an administrative sanction does not have deterrent effect and whether the offender has a poor compliance history.

Other factors which will be considered are whether the offender will have the financial capabilities to pay the judgment obtained from the civil enforcement action, whether there are identifiable persons who can be shown to have suffered loss, whether quantifiable profits have been made at the expense of identifiable persons and the number of investors who have suffered loss as a result of the breach or contravention and the extent of the loss will be considered in addition to the cost involved in an application to court to recover damages and whether these costs are justified compared to the benefit to investors.

SEC invites comments on the proposed framework for serious market misconduct, civil penalty proposed for the offence of insider trading and serious market misconduct, whether the SEC give the right to investors to sue for damages independently of the SEC for alleged misconduct irrespective of whether the misconduct has been proven in a court of law, proposed statutory defences for the offence of insider trading and proposed statutory presumption and defences for the offence of market manipulation.